What adjustments should I make when computing ROIC?

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AcadiFi · Accepted Answer

A clean ROIC requires careful adjustments on both numerator (NOPAT) and denominator (invested capital) so the ratio reflects core operating performance.

Numerator (NOPAT) adjustments:

1. Add back operating lease expense (post-ASC 842 adoption, leases sit in EBIT but capitalized interest is implicit).
2. Capitalize and amortize R&D to remove timing distortions for research-heavy firms.
3. Strip non-operating income (investment gains, one-time settlements).
4. Tax NOPAT at the marginal operating rate, not the effective rate (which may include repatriation or settlement noise).

Denominator (Invested Capital) adjustments:

1. Add operating lease right-of-use assets to invested capital.
2. Add capitalized R&D balance.
3. Subtract excess cash above 2% of revenue (working cash only).
4. Subtract non-interest-bearing current liabilities (accounts payable, accrued expenses).
5. Include minority interest.

For Meadowlark Industrial pre-adjustment ROIC of 11.2%, adjustments lifted R&D-adjusted ROIC to 13.7% and operating-lease-adjusted ROIC to 12.1%. The fully adjusted ROIC is 12.4% versus an 8.5% WACC, implying a 390 bp EVA spread.

Consistency matters more than precision. Apply the same adjustments across the peer set. A rough comparable ROIC beats a perfect one-off number.

What adjustments should I make when computing ROIC?

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